‘Bumpy road ahead for employers applying LIFO’

labour-guideBy Neil Searle, Senior Associate in the Labour, Employment and Human Rights department, Fasken Martineau

During any retrenchment exercise employers are faced with the difficult task of choosing and applying fair and objective selection criteria.  The Labour Relations Act, 1995 does not state expressly what selection criteria are fair and objective.

Over the years our courts have commonly accepted the Last-In-First-Out (LIFO) principle as the most objective way of selecting employees for retrenchment.  However, the rationale for LIFO is not merely that it is objective.  Other things being equal, it is more equitable to choose shorter serving employees for retrenchment than their longer serving colleagues because the latter generally deserve some recognition for their past loyalty.

Of course, the outcome of LIFO depends on the business unit or division in which it is applied.  A situation that often arises if employees are selected for retrenchment within a particular division is that shorter serving employees within that division may have longer periods of service with the employer than employees in other divisions.  This then raises the question whether the employees with longer service should be transferred to positions held by employees with shorter service in other divisions – the practice known as “bumping”.

Until recently, an employer was not under an obligation to consider bumping as a selection criterion, unless it was specifically raised by employees during the retrenchment consultation process.  This allowed employers to apply LIFO without having to consider or apply bumping.  However, this issue came under scrutiny in the Labour Appeal Court in the recent case of Nkosinathi Mbongiseni Mtshali v Bell Equipment.

In the Mtshali case, Mr Mtshali was employed by Bell Equipment as a production supervisor.  During 2009, the company ran into financial difficulties.  The company issued a retrenchment consultation notice to its employees in terms of section 189 of the Act and a CCMA commissioner was appointed to facilitate the retrenchment consultation process.  Retrenchment consultations took place between the company, NUMSA, UASA and Solidarity, of which Mr Mtshali was a member.

During the retrenchment consultation process, the company considered moving employees between various far flung geographical areas where its operations were situated, namely KwaZulu-Natal, the Free State and the Northern Cape.  However, in the company’s view, this was not feasible given the costs associated with moving employees.

The company subsequently entered into a Retrenchment Agreement with the unions in terms of which the agreed selection criteria to be applied were:

  • the geographical location of the position;
  • Qualification, competency and experience; and
  • Last-In-First-Out (LIFO).

The company had 10 production supervisors but only needed eight.  Through a process of voluntary retrenchments, five production supervisors left the company’s employ.  In Mr Mtshali’s division there were only two supervisors, namely Mr Mtshali and Mr Naidoo.  Mr Naidoo was a level higher than Mr Mtshali and had more experience than Mr Mtshali.  The company only needed one supervisor in this division.   Based on the agreed selection criteria, the company selected Mr Mtshali for retrenchment.  Mr Mtshali then challenged the fairness of his dismissal in the Labour Court.

The Labour Court held that the selection criteria were fair and objective and had been fairly applied across the various divisions in the company.  On the subject of bumping, the Labour Court concluded that the evidence pointed against the application of bumping because there was no previous practice of bumping in the company and because the company had operations in KwaZulu-Natal, the Free State and the Northern Cape and it was not reasonably practicable to move employees from one operation to another.  As a result, the Labour Court found that Mr Mtshali had not made out a case for bumping and that his retrenchment was the outcome of the reasonable application of fair selection criteria.  The Labour Court therefore held that Mr Mtshali’s dismissal was fair.

Mr Mtshali appealed against the judgment of the Labour Court on the basis that his selection for retrenchment was neither in accordance with the agreed selection criteria nor criteria that were fair and objective.  With respect to the agreed selection criteria, Mr Mtshali argued that the Retrenchment Agreement did not provide for the selection criteria to be applied selectively in separate production lines.  The company’s limitation of the criteria to separate production lines was thus an unfair application of the agreed selection criteria.  Put differently, this application of the agreed selection criteria meant that employees could not be moved or bumped between the company’s different geographical operations.

In deciding the matter, the Labour Appeal Court referred to the well-known case of Porter Motor Group v Karachi [2002] 4 BLLR 357 (LAC) in which the Labour Appeal Court held that “fairness is not a one way street…the Act requires both parties to attempt to reach consensus on alternative measures to retrenchment, so there is a duty on an employee as well to raise bumping as an alternative.”  The court also referred to the case of General Food Industries Ltd t/a Blue Ribbon Bakeries v FAWU and Others [2004] 9 BLLR 849 (LAC) in which the court found that the fact that employees had not explored the possibility of bumping during the retrenchment consultation process did not mean that they were precluded from challenging the fairness of their selection during the trial.

The Labour Appeal Court went on to consider the fact that it was not in dispute that Mr Mtshali had identified other employees who, according to him, should have been retrenched if LIFO together with bumping was applied.  Those employees had fewer years of service with the company than he did.  The company’s contention in this regard was that these employees were not retrenched because they were incumbents of their positions.  However, the court found that the company had simply decided not to consider applying bumping across different production lines or at all.  At the same time, the company had not led any evidence to show that the employees who were retained were better skilled, qualified or experienced than Mr Mtshali.  In fact, some of the employees were only appointed to their positions a few months before the commencement of the retrenchment consultation process.

The court also found that the company did not produce any evidence to prove that the Retrenchment Agreement precluded the consideration and application of bumping across different production lines or moving employees from one geographical area to another.  In addition, the company did not lead any evidence to suggest that bumping would have caused dislocation, inconvenience or disruption to its business.

In applying the law to the facts, the court stated that bumping forms part of LIFO and it was therefore incumbent upon the company to consult on its application to determine whether it would have been appropriate to apply bumping in the circumstances of the case.  It was not for the company to unilaterally decide that it would not be appropriate to apply bumping.  Any reasons why the company considered the application of bumping inappropriate or unfair should have been tabled during the retrenchment consultation process before a final decision was taken.

Consequently, the court decided that Mr Mtshali had proven on a balance of probabilities that if bumping had been applied he would not have been retrenched because of, among other things, his years of experience, qualifications and skills.  The court found that the company had failed to show that the agreed selection criteria were applied or that the criteria applied were fair and objective.  The court therefore held that Mr Mtshali’s dismissal was substantively unfair.

Lessons learned

The Labour Appeal Court has now made it clear that where an employer chooses to apply LIFO as a selection criterion, the employer must consult on the application of bumping and whether or not it will be appropriate to apply bumping in selecting employees for retrenchment.

To the extent that the employer does not wish to apply bumping, the employer must be able to explain why it would not be fair and appropriate to apply bumping.

Given the popularity of LIFO as a means of selecting employees for retrenchment, this judgment is likely to have far reaching consequences for how employers choose and apply their retrenchment selection criteria in future.

For more information please contact Neil Searle at nsearle@fasken.com

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